Inflation, Tax Rules, and the Stock Market

This paper shows how the interaction of tax rules and expected inflation can decrease substantially the share price per dollar of pretax earnings. The current analysis extends my earlier study [Feldstein (1978)] by recognizing corporate debt, retained earnings, and the role of diverse shareholder investments. As before, the analysis separates household and institutional investors.

The Future of Social Security Pensions in Europe

This paper discusses a possible solution to the double problem that faces European governments in dealing with the future of Social Security pensions. Like other governments around the world, they must deal with the rising cost of pensions that will result from the increasing life expectancy of the population. But the European governments have the extra problem that any solution must be compatible with a European Union labor market in which individuals from any member country are free to work anywhere within the European Union. The solution to this double problem that is developed in this paper combines an investment-based system of individual accounts with a 'notional defined contribution' system financed by pay-as-you-go taxes.

Imperfect Annuity Markets, Unintended Bequests, and the Optimal Age Structure of Social Security Benefits

The social security program now provides a constant real benefit throughout each retirees lifetime. This paper examines whether total welfare would rise if benefits were lower in early retirement years (when most individuals have some saving with which to finance consumption) and higher in later years (when the uncertainty of survival and the absence of actuarially fair private annuities makes the availability of social security benefits more important.) The analysis shows that there is a potentially important difference between the structure of benefits that would be preferred by the current population of workers and retirees and the structure of benefits that would maximize the steady state level of social welfare. This difference reflects the role of unintended bequests. The provision of higher benefits to older retirees reduces individually optimal savings and therefore the level of unintended bequests. While those bequests may have no value to the retirees, they are clearly of value to the young workers who will receive those bequests. More generally, the system of level benefits raises the steady state level of the capital stock and of total real income. The present paper provides an explicit analysis of a case in which the current workers want benefits to increase with age while the social security system that maximizes steady state welfare would provide higher benefits to young retirees than to the very old.

Housing, credit and consumer expenditure: general discussion

Mortgages ; Housing ; Consumer behavior

Capital Taxation

This paper is an introductory chapter to a book that brings together 22 of my papers written between 1965 and 1981. The chapter provides a summary of each paper and a more general discussion of the role of taxation in influencing the process of capita1 accumulation. The four sections of the book are: (1) Household and Corporate Saving; (2) Portfolio Behavior; (3) Business Investment and (4) Tax Incidence in a Growing Economy.

Do Private Pensions Increase National Saving?

This paper discusses how private pension programs differ from public social security in their likely impact on aggregate saving. Although private pensions are likely to reduce direct saving by employees, this should be offset by the combination of companies' partial funding and the shareholders response to unfunded liabilities. In contrast to several earlier empirical studies that implied that social security does depress national saving, the current time series evidence suggests that the growth of private pensions has not had an adverse effect on saving and may have increased saving by a small amount.

Adjusting Depreciation in an Inflationary Economy: Indexing versus Acceleration

With the existing "historic cost" method of depreciation, higher inflation rates reduce the real value of future depreciation deductions and therefore raise the real net cost of investment. The calculations in this paper show that this rise in the net cost can be quite substantial at recent inflation rates; e.g., the real net cost of an equipment investment with a 13 year tax life is raised 21 percent by an 8 percent expected inflation rate if the firm uses a 4 percent real discount rate. The effects of inflation on the net cost of investment can be completely eliminated by indexing depreciation. A more accelerated depreciation schedule can also lower the net cost of investment and make that net cost less sensitive to the rate of inflation. The current paper examines a particular acceleration proposal and finds that, for moderate rates of inflation and real discount rates, the acceleration proposal and full indexation are quite similar. For low rates of inflation, high discount rates, or very long-lived investments, the acceleration proposal causes greater reductions in net cost than would result from complete indexing. Conversely, for high rates of inflation, low discount rates, or very short-lived investments, the acceleration method fails to offset the adverse effects of inflation. Since the acceleration and indexation methods have quite similar effects under existing economic conditions, the choice between them requires balancing the administrative simplicity and other possible advantages of acceleration against the automatic protection that indexation offers against the risk of significant changes from the recent inflation rates and discount rates.